The plight of Carillion, which has gone bust, highlights the need for our sector to de-risk projects and programmes and create resilient supply chains, says Turner & Townsend’s Paul Connolly
Against a backdrop of Brexit, the health of the construction sector continues to waver. The plight of Carillion, which has entered compulsory liquidation, highlights the need for our sector to de-risk projects and programmes and create resilient supply chains.
As we start the new year, the sense of uncertainty hanging over the construction industry is palpable. ONS figures released this week show output growth in our sector at its worst level since 2012, falling by 2.1 percent from September to November 2017 compared to the previous three months.
Weaker growth in housebuilding, which has provided some buoyancy to the sector in previous months, a fall in commercial building and stagnating infrastructure demand are all contributing to the uncertain outlook. Our own UK Market Intelligence survey shows 30 percent of contractors reporting a cooling market in the third quarter of 2017 – up by 8 percent from the previous three months.
With the economic uncertainty showing few signs of abating, doing so will be essential to prevent construction insolvency becoming a theme for 2018
Contractor order book levels have fallen dramatically over the course of the last year as clients and investors take stock. Forecasted orders for 2018–19 recorded in the third quarter of last year are 41 percent below the equivalent levels from a year earlier.
The spectre of insolvency
The biggest challenge is the lower margins under which much of the industry is operating. Since the referendum vote, the average tier one contractor margin has fallen by almost 25 percent, with tender price inflation down by one third on forecasts from the start of 2017 as pressure mounts on contractors bidding for new work.
Slender operating margins restrict contractors’ ability to manage an uncertain climate. Unsurprisingly, Insolvency Service data is showing a sustained increase in insolvencies as a result. When annualised, the total number of new construction insolvencies increased by 6.6 percent on the year to the second quarter of 2017.
Shoring up the sector
In the long term success in managing these risks will rely on the ability to predict and control costs through new tools and working methods. The construction sector deal, announced last year as part of the government’s industrial strategy, holds huge potential to stimulate the investment we need to address structural change and boost productivity.
In the meantime, meeting immediate challenges will rely on more traditional tools of good governance and greater collaboration. Relationships and market insight are key to ensuring that procurement and purchasing teams understand a contractor’s exposure to high risk projects or clients, which could in turn threaten financial and operational viability.
At the same time, we need to avoid a race to the bottom on cost. Rather than simply looking at price, procurement teams should assess whether the contractor can provide financial security such as parent company guarantees or the ability to make performance bonds available as a means of de-risking an appointment.
Finally, we need to be alert to risk on live projects and act swiftly to stay on programme if the supply chain fails. Early warning signs, such as difficulty in securing labour or materials, or a reduction in progress on the works schedule should set alarm bells ringing, with the potential to trigger contractual clauses or seek alternative suppliers.
Ultimately, it is clients that stay close to their supply chains that will fare best in the current climate – monitoring, supporting and collaborating with partners in equal measure. With the economic uncertainty showing few signs of abating, doing so will be essential to prevent construction insolvency becoming a theme for 2018.
Paul Connolly is managing director - UK cost management at Turner & Townsend